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Europe appears to be dismembering. We see Spanish yields breaking
well above 7%. The Spanish government bond market is essentially
closed to private investors. The only funding for Spain, and many
of its political subdivisions, is now institutional and
governmental from elsewhere in the eurozone.

The sovereign default process in Europe resembles falling
dominoes. It started with Greece and has moved on to Ireland
(which appears to be attempting resuscitation on its own),
Portugal, Cyprus, and now Spain. The danger is that this
sequential toppling of countries may be accelerating.

Remember that the eurozone consists of 17 separate entities.
Germany is by far the largest. France is number two, Italy number
three. Spain is (or perhaps was) number four, at about 12% of the
total weight.

Each time a domino falls, the member state requires assistance
from the remaining member states. When Greece fell into financial
disarray and then failure, the other 16 states had to provide the
subsidy. When Ireland fell, there were 15. Portugal made it 14.
Cyprus made it 13. Now Spain leaves 12 remaining.

As the dominoes continue to fall, the costs are reapportioned
among the remainder, which is a shrinking cohort.

We are beyond worry about Spain. It is now a question of survival
or failure for Spanish governmental finance.

The biggest country to worry about is Italy. Italian spreads are
sending messages of danger and fear. Italy is the third largest
debtor in the world. Its debt-to-GDP ratio is over 120%. Its
economy is shrinking. The restructuring of Italian budgets has
not included the necessary expenditure cuts for Italy to survive.
Italy is now a troubled state.

France is the second largest country in the eurozone. It has
imposed excessive wealth taxes. It has used the prospective
collection of those taxes to balance, or improve, its budgetary
mechanism. A year or two from now, those tax receipts will have
disappeared. Why? French wealth is leaving France. It is going to
London, Basel, and elsewhere. When you threaten to confiscate
three-quarters or more of people’s wealth, you cannot expect them
to hang around when they have options.